Nick’s Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $320,000, have a fifteen-year useful life, and have a total salvage value of $32,000. The company estimates that annual revenues and expenses associated with the games would be as follows: Revenues $ 230,000 Less operating expenses: Commissions to amusement houses $ 80,000 Insurance 20,000 Depreciation 19,200 Maintenance 50,000 169,200 Net operating income $ 60,800 Exercise 14-8 Part 2 (Algo) 2a. Compute the simple rate of return promised by the games. 2b. If the company requires a simple rate of return of at least 14%, will the games be purchased?
Nick’s Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $320,000, have a fifteen-year useful life, and have a total salvage value of $32,000. The company estimates that annual revenues and expenses associated with the games would be as follows: Revenues $ 230,000 Less operating expenses: Commissions to amusement houses $ 80,000 Insurance 20,000 Depreciation 19,200 Maintenance 50,000 169,200 Net operating income $ 60,800 Exercise 14-8 Part 2 (Algo) 2a. Compute the simple rate of return promised by the games. 2b. If the company requires a simple rate of return of at least 14%, will the games be purchased?
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
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Chapter12: Cash Flow Estimation And Risk Analysis
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Exercise 14-8 (Algo) Payback Period and Simple Rate of Return [LO14-1, LO14-6]
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Nick’s Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $320,000, have a fifteen-year useful life, and have a total salvage value of $32,000. The company estimates that annual revenues and expenses associated with the games would be as follows:
| Revenues | $ 230,000 | |
|---|---|---|
| Less operating expenses: | ||
| Commissions to amusement houses | $ 80,000 | |
| Insurance | 20,000 | |
| Depreciation | 19,200 | |
| Maintenance | 50,000 | 169,200 |
| Net operating income | $ 60,800 |
Exercise 14-8 Part 2 (Algo)
2a. Compute the simple rate of return promised by the games.
2b. If the company requires a simple rate of return of at least 14%, will the games be purchased?
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